Investors have many ways to grow their wealth. They can buy Treasury bonds, commodities like oil or gold, or buy a home and let it appreciate in value over time. But compared to other asset classes, stocks have generated the highest average annual return over the past century.
One of the best parts about investing your money on Wall Street is that with thousands of stocks and exchange-traded funds (ETFs) to choose from, there is a very high probability that one or more securities match your risk tolerance and investment objectives.
Although growth stocks have propelled all three major indexes to record highs in 2024, dividend stocks which have significantly outperformed Wall Street over the past half-century.
In 2023, Hartford Funds Investment Advisors, in collaboration with Ned Davis Research, published a comprehensive report on the benefits that dividend stocks bring to investors. Specifically, the researchers compared the performance of dividend-paying companies to that of non-dividend-paying companies over the previous 50 years (1973-2023).
According to their findings, dividend stocks has recorded an average annual return of 9.17% over half a centuryand this while being 6% less volatile than the broad-based market. S&P 500This compares to a more modest average annual return of 4.27% for non-payers, which were 18% more volatile than the benchmark.
The biggest challenge for income investors is avoiding the yield trap, which is a company with a flawed operating model and whose falling share price has artificially inflated its dividend yield. Fortunately, safe, ultra-high-yielding dividend stocks TO DO exist.
Here are two ultra-high-yield dividend stocks—companies with yields at least four times the S&P 500’s current yield (1.33%)—that opportunistic income seekers can confidently pounce on in the second half of 2024.
Real estate income: 5.98% yield
The first high dividend stock that investors can invest in during the second half of the year is the blue-chip retail real estate investment trust (REIT). Real estate income (NYSE: O)Realty Income distributes its dividends on a monthly basis and has increased its payout for a staggering 107 consecutive quarters.
As you can see by looking at Realty Income’s stock chart, the company has not participated in the current market rally. The reason for its poor performance over the past two years is mainly the result of the Federal Reserve’s monetary policy changes.
Starting in March 2022, the U.S. central bank began its most aggressive rate-hike cycle since the early 1980s. In the process, yields on short-term U.S. Treasury bonds skyrocketed. Instead of buying various real estate investment trusts, investors chose to generate similar returns by buying Treasuries, which pose almost no risk to the invested capital.
But this momentum is unlikely to last much longer. Even if core inflation remains stubbornly high, the Fed is more likely to cut rates than raise them, as evidenced by the recent performance of Treasury yields. With Realty Income yielding 6%, this definitely puts this monthly dividend icon back on the radar.
What makes Realty Income a company other retail REITs envy is its massive, yet exceptionally resilient, commercial real estate (CRE) portfolio. As of the end of March, the company owned nearly 15,500 CRE properties. But here’s the catch: About 90% of its total rent “is resilient to economic downturns and/or insulated from e-commerce pressures,” according to the company.
Realty Income’s not-so-subtle secret is that it tends to lease standalone stores to proven brand-name businesses that provide essential goods and services. For example, grocery stores, convenience stores, dollar stores, home improvement stores, pharmacies, and car dealerships collectively account for 42% of annualized contract rent. Consumers will need food, beverages, prescription drugs, and vehicle maintenance/repairs regardless of how well or poorly the U.S. economy performs.
In addition, Realty Income has a track record of outperforming other S&P 500 REITs in terms of tenant occupancy. Since the beginning of this century, its median occupancy rate of 98.2% is 400 basis points higher than the median occupancy rate of S&P 500 REITs.
Another positive for current and potential investors is that Realty Income has been strengthening its existing commercial real estate portfolio and expanding into new channels. For example, its acquisition of Spirit Realty Capital in January 2024 was complementary to its existing commercial real estate portfolio, but also opened doors in new sectors.
Last but not least, Realty Income stock is trading at a historically cheap valuation relative to its forward cash flows. While the stock has averaged a 17.3x forward cash flow multiple over the trailing five-year period, opportunistic income seekers can buy Realty Income’s growth stock now for 11.8x forward 2025 cash flows.
Pfizer: 6% yield
The second ultra-high-yield dividend stock that demands buying for the second half of 2024 (or even well beyond) is pharmaceutical titan Pfizer (NYSE:PFE)While Pfizer has no guarantee of increasing its dividend on an annual basis, its current yield of 6% is safe.
Pfizer, like Realty Income, has been left out of the current bull market rally. As I’ve pointed out before, Pfizer’s underperformance is a reflection of its own success.
Pfizer is among the few drugmakers that have successfully developed COVID-19 therapies. In 2022, the company’s COVID-19 vaccine (Comirnaty) and oral treatment (Paxlovid) generated more than $56 billion in combined revenue. This year, combined sales of these blockbuster treatments will total about $8 billion. For those of you watching at home, that’s a $48 billion sales hit that Wall Street and investors had to deal with.
But perspective changes everything. While COVID-19 sales aren’t as high as they used to be, Pfizer wasn’t generating a dime of COVID-19 revenue before the pandemic. Those estimated $8 billion in sales in 2024, combined with organic growth from existing product lines and newly launched therapeutics, have pushed annual sales from $41.9 billion in 2020 to a mid-estimate of $60 billion this year.
Digging a little deeper, Pfizer’s sales in the quarter ended March, excluding COVID-19 treatments, jumped 11% at constant currency. Continued double-digit operational growth for blockbuster blood thinner Eliquis suggests Pfizer’s total portfolio is significantly stronger today than it was four years ago.
Pfizer’s $43 billion acquisition of cancer drug developer Seagen, which closed in December, is another reason why current and potential investors should be excited about the future. While the acquisition-related costs are weighing on Pfizer’s earnings per share (EPS) in 2024, the combination is expected to deliver significant cost savings and EPS improvements in 2025 and beyond. Additionally, the deal significantly expands Pfizer’s oncology pipeline and provides an immediate boost to annual sales of more than $3 billion.
Like Realty Income, Pfizer has the support of macroeconomic factors. Since we have no control over when we get sick or what diseases we develop, demand for everything from prescription drugs to devices tends to remain constant regardless of the economic climate. The fact is, Pfizer is very resilient to economic downturns.
The final piece of the puzzle is that Pfizer stock is cheaper than it has been in a very long time. The company’s shares recently hit their lowest level in a decade. Moreover, the stock is valued at about 10 times forward earnings, which is slightly below the average multiple of 11 times forward EPS that Pfizer stock has traded at over the past five years.
Should You Invest $1,000 in Realty Income Right Now?
Before you buy Realty Income stock, consider this:
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer and Realty Income. The Motley Fool has a disclosure policy.
Time to Pounce: 2 Ultra-High-Yield Dividend Stocks Worth Buying in the Second Half of 2024 (and Beyond) was originally published by The Motley Fool
